Self Managed Super Fund (SMSF) ArticleBetter Super Calculations

By Tony Negline.

This article may be out of date.

14th October 2009

Jim and Sandra recently wrote and asked how they should have converted their super tax components to the Costello Better Super components. Technically a fine applies to those who didn't complete this task before July '08. As you will see these calculations aren't easy.

Under the Better Super reforms super benefits have two components – Taxable and Tax-free. This was a major change because under the old regime, a super benefit could have up to 8 different tax components.

Firstly some details about our reader's situation.

Jim has been a member of their Self Managed Super Fund since 1994. Back then he started an allocated pension with $557,840. Of this amount $21,953 was Undeducted Contributions. The remaining balance was split between his Pre-July 1983 and Post-June 1983 service periods. His eligible start date (that is the date he started working for the first employer to contribute to a super fund for him) was 28 January 1963. Some of that 1963 super money was in his $557,840 account balance. He has never taken a lump sum withdrawal from this pension.

Sandra joined the Self Managed Fund in May 2007 when she contributed $887,920. Of this amount $782,807 was not claimed as a tax deduction and was initially classed as an Undeducted Contribution. Prior to this date she had never had any other superannuation.

She also made contributions of $250,000 in July 2007. Of this amount $100,000 was claimed as a personal tax deduction which means that her Non-Concessional Contributions were $150,000. A contribution of the same amount and structure was also made in the 2009 financial year. She has not taken any benefits out of her super fund.

Let's solve Sandra's situation first. Our couple need to know what Sandra's Tax-free Component is given that her total contributions have been $1,342,153 after 15% contributions tax but her account balance is much less than this amount.

Her Tax-free Component is made up of a Crystalised Segment and a Contribution Segment.

Sandra's Crystalised Segment is that portion of her benefit which included various ETP components (for example Undeducted Contributions and Pre-July 1983 Component) on 30 June 2007. This means her Crystalised Segment is $782,807 – her Undeducted Contributions at that time.

Her Contribution Segment is $300,000.

Her Tax-free Component is therefore $1,082,807. This will remain unchanged until a lump sum is paid out of her account or another Non-concessional Contribution is made to her super account.

The remainder of Sandra's account balance, effectively the balancing item, is her Taxable Component.

Let's suppose for a moment that because of the financial market melt-down her account balance is now $1 million. What would be her Tax-free and Taxable Components? The Tax-free Component will remain at $1,082,807 unless a lump sum is paid out.

As her Tax-free Component is greater than $1m, all of the account balance would be Tax-free Component if it were paid out as a lump sum or a pension started. This will remain the case until her account balance increases above her Tax-free Component 'balance' of $1.082 million.

Now let's turn to Jim. He tells us that the account balance for his pension on 30 June 2007 was $908,000.

We need to work out how much of his undeducted contributions (UDCs) remain at this date. When his allocated pension started, his UDCs were $21,953 and Jim was aged 56. When his pension commenced Jim would have referred to the 1985/87 Australian life tables in order to work out how much of his UDCs were to be returned to him each year via pension payments. The relevant number was 21.23. This means that each year he received $1,034 ($21,953 / 21.23) in UDCs as part of his pension payments.

The rules that transitioned the super tax components into the Better Super regime demand that anyone receiving a pension or Eligible Termination Payment (ETP) annuity on 30 June 2007 who turns 60 before that date has to convert their old ETP components into the new Tax-free and Taxable Components on 30/6/07.

This rule applies to Jim as he was over 60 on that date. (A separate rule applies for those under 60 but we'll not review that here.)

How do reconstruct his ETP Components at 30/6/07? Firstly we work out the UDCs that remain unused. By 30 June 2007, Jim's pension had been running for 13 years which means he has used $13,442 of UDC and $8,511 remains.

What about his Pre-July 1983 and Post June 1983 Components? We know that Jim started work on 28 January 1963. There were 16,224 days between that date and our calculation date of 30 June 2007. Between 28/1/1963 and 30 June 1983 there were 7,459 days. His Pre-July 1983 Component is $417,680.

His Better Super Tax-free Component at 30 June 2007 is $426,191 or 47% of his account balance. This means that 47% of each and every pension payment will be Tax-free Component.

From 1 July 2007 onwards all of Jim's allocated pension income is tax-free because he is over 60 so these calculations appear academic.

However when Jim dies the same percentages will apply. If some or all of the Taxable Component is paid to non-dependants then they will have to pay tax on whatever portion of the Taxable Component they receive.

Finally, the above analysis of these numbers didn't involve checking the accuracy of the information supplied by Jim and Sandra. For example I didn't see any official documentation which showed Jim really started work in January 1963. There was also no confirmation that Sandra was allowed to claim her personal contributions as a tax deduction and that the essential paper-work necessary to allow that deduction had been completed.

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